The current situation of the US dollar resembles the setting of the Plaza Accord of 1985, when the world agreed to manipulate the dollar until it fell to stop it from harming the global economy.
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Some are contemplating a rare, if not unimaginable, move in response to the dollar’s rapid rise: major nations colluding to manipulate the US currency until it falls.
It’s happened before, most notably with the Plaza Accord of 1985, which occurred amid high inflation, a vigorous Federal Reserve rate-hike campaign, and a surging dollar. In other words, a setting that resembles today — a parallel that the Group of Seven finance ministers and central bank governors will not overlook when they meet this week.
The US dollar has been in high demand this year as interest rates have risen faster in the US than in other developed nations, and the situation in Ukraine has prompted a stampede to the ultimate haven. The yen has been clobbered to a two-decade low by the dollar’s 6.3 % surge since the start of the year, and the euro is virtually back to 1-to-1 parity with the US currency for the first time since 2002. As a potential line in the sand, investors are looking for the yen to fall below 150 per dollar and the euro to fall to 90 cents.
The current situation reminds Stephen Miller, a four-decade market veteran and former head of fixed income at BlackRock Inc. in Sydney, of his time as a young buck in Australia’s Treasury Department, where he had a front-row seat to the unravelling of the Plaza Accord.
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France, Japan, the United Kingdom, the United States, and West Germany decided to weaken the dollar as part of that agreement, believing that the dollar’s massive rise was harming the global economy.
“One of the options down the track could be some sort of coordinated intervention,” said Miller, now an investment consultant at GSFM, a unit of Canada’s CI Financial Corp. which oversees about $289 billion in assets. “Markets recognize that central banks are in a bind when they’ve only got the interest-rate lever to push, so there’s already market chatter contemplating these sorts of scenarios including a Plaza Accord-style move.”
At this point, no one is predicting immediate action. Any effective agreement would require US support, which is unlikely in the near term given the dollar’s strength, which makes imports cheaper — an appealing attribute in an era of rising inflation.
Finance experts do, however, see future pain points for countries outside of the United States that might strengthen the call for global intervention.
According to Alan Ruskin, chief international strategist at Deutsche Bank AG, the euro might “start raising alarms” if it falls below 0.90 against the dollar, down from approximately 1.05 now. Rajeev De Mello of GAMA Asset Management believes a yen drop to 150, a level last seen in the 1990s, might be the catalyst. According to Goldman Sachs Group Inc. strategist Zach Pandl, an unruly surge in the dollar might be a game-changer.
There are clear parallels between the strength of the US currency in 1985 and now: the Federal Reserve’s trade-weighted dollar index has increased at an annualized rate of 14% this year, faster than the 12% rate witnessed in the five years preceding up to the accord.
Inflation in the United States is at its highest level since the 1980s, when Federal Reserve Chairman Paul Volcker increased rates to as high as 20%, and current Chairman Jerome Powell has pledged to do everything it takes to slow price growth.
“Certainly it’s something to consider especially if we see a crash in other currencies,” said De Mello, global macro portfolio manager at GAMA in Geneva. Such a drop might be triggered by a “huge” divergence in monetary policy, prompting the Japanese to “say ‘our yen has fallen too much’ and other countries would also be worried about the dollar.”
However, American participation is required for a meaningful Plaza Accord II. The 1985 agreement, which is named after the famous Plaza Hotel in New York, where the conference was held, was signed only after the second Reagan administration changed its mind about foreign-exchange intervention, highlighting the difficulty of coordinating any major agreement without American support.
Another factor is China’s rise in global markets. Any coordinated central bank action will almost certainly require Beijing’s approval, but the yuan is not currently trading at levels that would necessitate intervention, according to GAMA.
Jane Foley, head of foreign-exchange strategy at Rabobank in London, said, “I have difficulty seeing the likelihood of concerted intervention at the moment.” “Why would the Fed tighten financial conditions on one hand and then loosen them with the other by intervening against the dollar?”
Colin Graham, head of multi asset strategies at Robeco Groep, shares this viewpoint.
“The stronger dollar tightens monetary conditions and this will be helping” the Fed’s policy, said Graham. “The hurdle for coordinated action is still very high.”
Treasury Secretary Janet Yellen said on Wednesday that it’s understandable that the dollar has benefited as interest rates in the United States have risen, and that these gains have worried some other countries.
At a news conference in Bonn, Germany on Wednesday, Yellen stated, “We’re committed to a market-determined exchange rate.” “It’s reasonable that the dollar has risen,” she said, citing higher US interest rates as a source of capital inflows.
However, if the US economy shrinks and a consistently high greenback stifles everything from jobs to commerce, this reticence may change. According to a Bloomberg study of economists, the likelihood of a recession within the next year is at 30%, the highest level since 2020.
While most major currencies are still far from crisis levels that would demand a new Plaza Accord, it cannot be fully ruled out, according to Jack McIntyre of Brandywine Global Investment Management in Philadelphia.
“Could it happen? Yes, perhaps, especially if the US enters a recession and a stronger dollar hurts the labor market,” he said. “It’s not imminent. I see the dollar weakening at some stage — but you never say never.”